Activities Unrelated to the Medicare Shared Savings Program and Tax Exemption for ACOs

Last November, the IRS released Revenue Ruling 201145025 denying an application for tax-exempt status of an entity owned by a tax-exempt hospital (the “Entity”). The Entity primarily contracted with commercial payors to provide hospital services and physician services. The Entity’s activities are comparable to the activities an Accountable Care Organization (ACO) may conduct unrelated to the Medicare Shared Savings Program (the “Savings Program”), such as shared savings programs with commercial payors. The Revenue Ruling, therefore, provides additional guidance regarding the IRS’ concerns relating to the activities of ACOs that are unrelated to the Savings Program.

The Savings Program was enacted as part of the Affordable Care Act in 2010. Under the Savings Program, providers and suppliers may work together to manage and coordinate care for Medicare fee-for-service beneficiaries through an ACO. If the ACO meets certain quality standards and savings benchmarks, then the ACO is eligible to share a portion of the savings with Medicare.

In Notice 2011-20 and Fact Sheet FS-2011-11, the IRS indicated that “an ACO generally will further the charitable purpose of lessening the burdens of government,” i.e., lowering costs to the government. Therefore, an ACO may qualify as a tax-exempt entity and an ACO’s activities related to the Savings Program would not endanger a participating tax-exempt entity’s tax-exempt status. Furthermore, the IRS stated that similar activities with other governmental payors, such as Medicaid, would qualify as tax-exempt because they would also lessen the burdens of government.

The IRS, however, expressed concern regarding similar activities with commercial payors unrelated to the Savings Program. Generally, these unrelated activities would not lessen the burdens of government and only benefit private interests. For example, negotiating with private health insurers on behalf of unrelated parties is not generally a charitable activity, but rather the negotiations benefit the participating physicians.

The IRS’ concern is based on prior rulings regarding physician-hospital organizations, independent physician associations, and health maintenance organizations. For example, in Rev. Rul. 86-98, 1986-2 C.B.74, the IRS held that an IPA that provides health services through written agreements with HMOs does not qualify for tax exemption because its primary activity was to serve as a “bargaining agent” between its members and HMOs, and the primary beneficiary were its physician-members and not the community as a whole.

Similarly, the Entity’s activity was contracting with private payors for hospital services and hospital services on behalf of the hospital owner and participating physicians. Although the Entity also provided education to participating physicians, the IRS concluded, in the Revenue Ruling, that the Entity served the private interests of the participating physicians because the primary activity was negotiating payor agreements.

The IRS’ concerns presented in the Notice, the Fact Sheet, and the Revenue Ruling present a hurdle to ACOs that go beyond participating in the Savings Program and similar programs with other governmental payors. If an ACO wants to be tax-exempt, it may need to limit its primary activities to interactions with governmental savings programs. Tax -exempt participants also need to pay attention to these determinations because although the activities of an ACO are unlikely to threaten the tax-exempt status of most hospital participants due to the scope of the ACO’s activities in comparison to the activities of the hospital as a whole, an ACO’s activities unrelated to a governmental savings program may result in unrelated business income taxation to a hospital participant.

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